Tuesday, October 27, 2009

"Tagging" is a popular idea in tax policy scholarship these days. The idea goes back to a 1978 paper by 2001 Economics Nobelist George Akerlof, called "The Economics of 'Tagging' as Applied to the Optimal Income Tax, Welfare Programs, and Manpower Planning." The idea is finding observable attributes (tags) that correlate, e.g., with high income earning ability, and basing tax burdens on that. An example might be a height tax.

With that in mind, I've come up with a paper title that almost doesn't need that good a paper to justify itself. Offered to the world, as I don't plan to use it. Perhaps it would be a political economy piece about the perils of the approach?

Monday, October 26, 2009

Two novels I've read this month - Claire Messud's The Emperor's Children and David Lodge's Deaf Sentence - appear to be building towards unpleasant or even horrific climaxes for the lead characters, but then they kind of trail away instead. I half-wanted the worst to happen, though also finding the prospect painful. Traditional plot structuring would have suggested ending with explosions rather than damp firecrackers (though Messud's 9/11 ending is hardly comforting). I suppose they picked the quieter endings in order to avoid formulaic predictability (like when showing the gun in Act 2 means that someone's going to use it in Act 3). But there's nothing wrong with earning a dramatic payoff so long as you can keep it fresh and surprising.

Sunday, October 25, 2009

They're getting along better these days, though Seymour and Buddy still stage the occasional squeakfest or batting practice. We are still building the trust level with Seymour (look what 7 years have done for us with the once-shy Ursula). Constant love-bombing gradually breaks down their defenses. A la Ringo Starr, who once scribbled that his favorite type of person was "Enyone who likes me."

Monday, October 19, 2009

I had almost forgotten that the bizarre witching hour for a one-year disappearance of the federal estate tax is almost at hand. Under current law, the tax will entirely disappear on January 1, 2010, and then return to life at its pre-2001 levels on January 1, 2011.

If economics researchers had political clout, they would definitely lobby for the retention of this bizarre anomaly, which could permit testing of Joel Slemrod's and Wojciech Kopczuk's noted and infamous finding (which won them the coveted Ig Nobel Prize in economics in 2001) that the timing of death is tax-responsive. (Slemrod and Kopczuk note that their data does not permit them to distinguish between the hypotheses of actual change and merely reported change in the timing of death.)

But speaking more seriously, this is a crazy and irresponsible thing to do. Imagine a very wealthy individual, without a surviving spouse, in an irreversible coma. The time is somewhere between Christmas and New Year's Eve, just over two months from now. Suppose this individual is ready to go and has even left a clear-cut living will, but that dying before the new year would cost the family $50 million of estate tax.

Luckily, I've never been faced with making decisions about a family member in these horrendous circumstances, but I have known a couple of gerontologists who get angry about excessive use of "heroic" measures, when they feel it's hopeless, disrespectful of the dying person's wishes, and being done simply because the family isn't ready to let go.

However one comes out on end-of-life care questions (and it is a true minefield), we surely don't want an estate tax thumb on the scales.

Now fast forward to the midnight hour of December 31, 2010. If Congress still hasn't done anything, living an hour longer could cost a given family $50 million of estate tax. And there are really discretionary choices people can make, well short of illegal euthanasia. E.g., provide antibiotics or not, keep the food tube going or not. Once again, this really is not a choice we want anyone to face with huge estate tax consequences in the background.

In a sane and rational political world - perhaps on the planet Zircon - Congress, if unable to address a permanent solution in the time left to it, would simply extend the 2009 estate tax rules for a year and then try to make a final decision in 2010. To be sure, continuing one-year extensions of the 2009 rules, needing to be lobbied for each time, would be a risk and itself a bad outcome. But certainly one worth taking in late 2009 if Congress is unable to address the issue seriously before the end of the year, as seems quite likely.

But will the Obama Administration try to push this? There may be political costs and benefits they need to evaluate, especially given the number of balls they already have up in the air. Would a one-year extender lead to a Senate filibuster? (My uninformed guess is yes.) Would they be able to break the filibuster? (My guess is no.) So perhaps we are going to get the mad research experiment after all.

My own take on where we ought to end up on the estate and/or inheritance tax is that there is enough empirical evidence that people under-plan for it to make it an optimal piece of the overall toolkit, even if one were to assume that the net revenue and distributional consequences of repealing it were zero due to the ability to make offsetting changes to other instruments, e.g., the income tax. But that is a separate question from whether or not to let this crazy one-year window pop open.

Sunday, October 18, 2009

Today I spoke on a panel at NYU Law School's Family Day, when students' parents, significant others, siblings, etc. come to the school for a series of events. Pretty big crowd for the panel - probably about 500 or so. My topic was the long-term fiscal problems we face, and what the Obama Administration is (or isn't) doing about it. I showed them such charts, explained healthcare's role as an important contributor but not the sole cause, expressed extreme skepticism about how it is going to play out, based however on my read of U.S. politics rather than anything about the current forecasts, and so forth. I thought it went well & that I was in good form; this is something speakers (or certainly I) naturally care about. Makes one feel good and indeed invigorated.

Then I came home to do a baking project I had in mind, making a couple of plum loaf breakfast breads using very ripe and flavorful but too-soft late-season Italian plums that I had purchased precisely with this in mind. You mix the batter (dry and wet ingredients separately and then together), and the last step is to add and mix in your defining liquid ingredient, in this case the plum puree.

Only, I took the wrong container out of the fridge and mixed in instead some very garlicky tomato sauce. Once I had done this, it was too late to do anything but either (a) throw the whole thing out (two whole loaves' worth) or alternatively (b) bake it anyway and see what happens.

I chose option (b) but was physically revolted by what came out of the oven an hour later. (Though others get the final word before we throw it out.) The problem isn't the tomato, I suppose one could substitute it for a more conventional dessert-style fruit though I certainly wouldn't try it without good reason to think it would work. But strong garlic plus sweet in the same food item is for some reason revolting, at any rate to me, and even if it does all mix in the stomach later on anyway.

Score one good experience for the day and one embarrassing if moderately amusing botch.

Thursday, October 15, 2009

I have a short note, "The Obama Administration's tax reform proposals concerning controlled foreign corporations," that just came out in the British Tax Review. The full cite is 4 BTR 331-339 (2009). As it may not be easy to access in the U.S. interested parties can contact me by e-mail for a reprint.

Having completed the first 4 (out of 7) chapters of my book-in-progress, "Fixing the U.S. International Tax Rules," I've now decided on a detour that may take me a couple of months. To give one of its relatively novel ideas more prominence, I'm going to write a stand-alone article entitled "The Case Against Foreign Tax Credits."

I've written a one-paragraph abstract, but feel like keeping it up my sleeve (or under my hat?) for now. But readers who know that I favor moving towards exemption for what we classify as "outbound" investment will correctly surmise that I am not in fact proposing a hefty (or any) tax increase for it via the elimination of foreign tax creditability.

Courtesy of Brad DeLong, Ken Rogoff has some sobering words about the next Halloween trick that the world economy may soon be facing.

I remember Ken Rogoff from the strangely compelling WNET-TV coverage of the Fischer-Spassky chess championship match in 1972, where he was the briefly immortal Shelby Lyman's # 1 in-house guest analyst (leaving aside the hot-line phone connection to Edmar Mednis and the gang at the Marshall Chess Club). But I digress, and few readers are likely to share my memories of that high point of public television. Anyway, Rogoff is now a leading (perhaps the leading) international finance expert, and here is what he has to say on a subject where our interests overlap:

"Everyone from the Queen of England to laid-off Detroit autoworkers wants to know why more experts did not see the financial crisis coming. It is an awkward question.

"How can policymakers be so certain that financial catastrophe won't soon recur when they seemed to have no idea that such a crisis would happen in the first place?

"The answer is not very reassuring. Essentially, there is still a risk that the financial crisis is simply hibernating as it slowly morphs into a government debt crisis.

"For better or for worse, the reason most investors are now much more confident than they were a few months ago is that governments around the world have cast a vast safety net under much of the financial system.

"At the same time, they have propped up economies by running massive deficits, while central banks have cut interest rates nearly to zero.

"But can blanket government largesse be the final answer? Government backstops work because taxpayers have deep pockets, but no pocket is bottomless.

"And when governments, particularly large ones, get into trouble, there is no backstop. With government debt levels around the world reaching heights usually seen only after wars, it is obvious that the current strategy is not sustainable.

"If the trajectory is unsustainable, how long can debt keep piling up? We don't know. Academic economists have developed useful tools to predict which economies are most vulnerable to a financial crisis.

"But, although we can identify vulnerabilities, getting the timing right is virtually impossible.

"Our models show that even an economy that is massively overleveraged can, in theory, plod along for years, even many decades, before crashing and burning.

"It all boils down to confidence and coordination of expectations, which depend, in turn, on the vagaries of human nature. Thus, we can tell which countries are most vulnerable, but specifying exactly where and when crises will erupt is next to impossible.

"A good analogy is the prediction of heart attacks. A person who is obese, with high blood pressure and high levels of cholesterol, is statistically far more likely to have a serious heart attack or stroke than a person who exhibits none of these vulnerabilities.

"Yet high-risk individuals can often go decades without having a problem. At the same time, individuals who appear to be ``low risk" are also vulnerable to heart attacks.

"Of course, careful monitoring yields potentially very useful information for preventing heart attacks. Ultimately, however, it is helpful only if the individual is treated, and perhaps undertakes a significant change in lifestyle.

"The same is true for financial systems. Good monitoring yields information that is helpful only if there is a response. Unfortunately, we live in a world where the political and regulatory system is often very weak and shortsighted.

"Indeed, no economy is immune to financial crises, no matter how much investors and leaders try to convince themselves otherwise, as Carmen Reinhart and I show in our new book, ironically entitled 'This Time is Different: Eight Centuries of Financial Folly.'

"Right now, the latest 'this time is different' folly is that, because governments are taking all the debt on their shoulders, the rest of us don't have to worry.

W"e are constantly reassured that governments will not default on their debts. In fact, governments all over the world default with startling regularity, either outright or through inflation.

"Even the U.S., for example, significantly inflated down its debt in the 1970s, and debased the gold value of the dollar from $20 per ounce to $34 in the 1930s.

"For now, the good news is that the crisis will be contained as long as government credit holds up. The bad news is that the rate at which government debt is piling up could easily lead to a second wave of financial crises within a few years.

"Most worrisome is America's huge dependence on foreign borrowing, particularly from China ― an imbalance that likely planted the seeds of the current crisis.

"Asians recognize that if they continue to accumulate paper debt, they risk the same fate that Europeans suffered three decades ago, when they piled up U.S. debt that was dramatically melted down through inflation.

"The question today is not why no one is warning about the next crisis. They are. The question is whether political leaders are listening.

"The unwinding of unsustainable government deficit levels is a key question that G20 leaders must ask themselves when they meet in Pittsburgh later this month. Otherwise, Queen Elizabeth II and Detroit autoworkers will be asking again, all too soon, why no one saw it coming."

Wednesday, October 14, 2009

If Diogenes went to Washington, he could stop looking once he ran into Bruce Bartlett.

Bruce's new book shows that he is not just intellectually honest but persuasive, personally candid and - I hate to use this much-abused word but it's really the apt one here - genuinely patriotic, in that he prefers trying to save the U.S. from a fiscal calamity to winning partisan fights, endlessly reliving past political wars, getting in good with the big money think tanks or his old friends, etcetera.

Bruce can't help being a standing reproach to conservative intellectuals who have a conscience but figure they just can't afford to jump into that pool. But each one who does so warms it up a bit for the next. So far his endorsements have come mainly from the left, where it doesn't take so much courage. AEI - Cato - Heritage - is anyone there listening?

Saudi Arabia wants monetary compensation from consumer countries if they cut their oil purchases in response to global warming.

Next up, crack dealers want compensation from former customers who get their lives in order.

This is actually a transition issue, akin to those I discuss in my book on the subject. Suffice it to say that the incentive effects (Saudi Arabia would have less need to respond to the risk of declining sales) are almost as appealing as the distributional effects.

Friday, October 02, 2009

My article from last fall, "The Long-Term U.S. Fiscal Gap: Is the Main Problem Generational Inequity?," has now appeared in print at 77 George Washington University Law Review 1298-1357 (2009). It is part of a symposium volume in the GWU Law Review concerning generational equity. I suppose this is old news at this point, but interested readers can now download the final published version here.

Abstract for the piece is as follows:

Current U.S. budget policy is unsustainable because it violates the intertemporal budget constraint. While the resulting fiscal gap will eventually be eliminated whether we like it or not, the big issue in current budget debate is whether the ultimately unavoidable course corrections should start now or be left for later. This paper argues that concerns of generational equity, which often are relied on by those demanding a prompt course correction, do not convincingly settle the issue, given empirical uncertainties about future generations' circumstances. However, efficiency issues create powerful grounds for urging a course correction sooner rather than later, on three main grounds: to eliminate the risk of a catastrophic fiscal collapse, achieve the advantages of tax smoothing, and smooth adjustments to the consumption made possible by various government outlays. Political economy considerations suggest that the risk of a catastrophic fiscal collapse may be significant even though in principle it could easily be avoided.

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 16 and 19) as well as four (!) cats. For my wife Pat's quilting blog, see Patwig’s Blog.